Why Oracle Stock Plunged More Than 12% This Week
Key Points
While Oracle topped Wall Street's earnings expectations, it fell short of revenue targets, and its surging capital expenditures are making shareholders uneasy.
Broadcom added to the market's anxiety on Thursday with an earnings release showing its margins are contracting.
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Shares of Oracle (NYSE: ORCL) are falling this week, down 12.9% as of 2:41 p.m. ET. on Friday. The drop comes as the S&P 500 and Nasdaq-100 lost 0.6% and 1.8%, respectively.
Oracle reported mixed earnings on Wednesday for its second quarter, revealing that the company's artificial intelligence (AI) spending spree is rapidly accelerating. The report, along with Broadcom's earnings release the following day, was enough to reignite fears of an AI bubble.
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Oracle's capex came in well above targets
Oracle reported earnings per share (EPS) of $2.26, handily beating Wall Street's target of $1.64. The earnings beat was overshadowed by Oracle's revenue miss, delivering $16.06 billion when $16.21 billion was expected, as well as the extreme growth in its AI investments.
Oracle's capital expenditures (capex) clocked in at $12 billion for the quarter, up from just $4 billion in the same period last year. It was also 50% more than the Street was expecting. Investors are wondering just how sustainable the capex spend is for the company, given how much it is relying on expensive financing.
Image source: Getty Images.
Broadcom's report on Thursday did little to calm investor nerves; while it reported record revenue, the company's CEO, Hock Tan, said that its AI sales have lower gross margins than other parts of its business.
Oracle is taking on serious debt
Oracle is selling a substantial amount of high-interest corporate bonds to fund its escalating capex. It's a seriously risky play that requires AI demand to continue to grow at a lightning pace. Any material weakness in that demand would be very bad news for the company and its shareholders.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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